Labor Market Institutions and Labor Market Segmentation in Sri Lanka
57
analysis of gender and ethnicity-related wage inequalities). While the regression estimates relating to education variables are significant only for formal employees, note that education is most highly rewarded in the formal sector and least in the informal sector. At higher levels of education, informal employees enjoy half the returns to education enjoyed by equivalently educated employees in the formal private sector. The variables related to firm size are by and large not significant other than for the 100 employees plus group, which earns significantly more than employees in microenterprises in the formal sector and significantly less than employees in microenterprises in informal employment. Temporary and casual workers earn significantly less than permanent employees in formal employment.
Impact of Employment Protection Legislation Labor market segmentation can also be fueled by employment protection legislation. In particular, large firing costs and procedural obstacles to worker dismissals may contribute to the emergence of dual labor markets. Such costs and obstacles reduce job separations as well the hiring of new workers, with informal sector workers and vulnerable groups such as young workers and females being particularly hurt. Firms hire fewer workers following positive shocks that would otherwise encourage them to expand, because high severance payments make it costly for firms to lay off workers in the face of a negative economic shock (Bertola 1992). Thus dismissal costs act just like hiring costs, reducing job flows and the speed with which labor markets adjust to exogenous shocks and constraining the reallocation of labor from declining to expanding sectors. Recent microeconometric analyses have shown that labor market regulations can produce important efficiency losses. For example, Heckman and Pages (2000) show that in Latin America, more stringent job security laws are associated with lower employment and higher unemployment, particularly among young workers. Similarly, Besley and Burgess (2004) find that labor regulations in India had important adverse effects on output and employment. Ahsan and Pages (2007) report that regulations concerned with labor disputes and job security hurt covered workers. Kugler and Saint-Paul (2004) show that restrictions on firing reduce incentives for firms to hire the unemployed and lengthen unemployment spells for workers in the United States. Bassanini and Duval (2006) find that changes in tax and labor policies explain about half of the 1982–2003 changes in unemployment among members of the Organisation for